New Report: Wall Street Analysts Concerned about Impact of Oil Prices, Energy Policies and Climate Risk on Auto Sector Companies
A new Ceres report released today finds that the uncertainty in the U.S. regarding the future course of energy and climate change policy is a major problem for investors and Wall Street analysts in assessing the value of auto companies, and that analysts need better disclosure from auto companies about their strategies for managing the risks and capturing the opportunities posed by new energy and climate change policies taking effect worldwide.
The report, Climate Risk and Energy in the Auto Sector - Guidance for Investors and Analysts on Key Off-balance Sheet Drivers, highlights key findings from an auto analyst briefing last December at JP Morgan in New York City where Wall Street analysts, institutional investors such as CalPERS and CalSTRS, and others gathered to discuss the impacts of high oil prices, fuel efficiency and foreseeable climate change regulations on the future of the auto industry. Three conclusions were widely agreed upon by the analysts at the meeting:
- Regulatory uncertainty on climate change is a major problem for the auto sector;
- Flexibility in manufacturing is a key factor for future profitability;
- Investors need improved disclosure on the risks and opportunities posed by fuel prices, climate change, and other factors.
"Given that many corporate CEOs now agree that mandatory climate change regulations are inevitable, Wall Street needs more clarity from President Bush and Congress on the eventual structure of climate policy so analysts can assess the financial and competitive implications on auto companies accurately," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk, which includes over 50 institutional investors managing nearly $3 trillion in assets. "Investors are calling for policy certainty and better climate risk disclosure so analysts can better estimate the fair value of the auto companies in their portfolios."
Experts also agreed at the December meeting that U.S. automakers have less flexibility to meet changing regulatory and consumer demands. The report states that only two manufacturing facilities in the U.S. - facilities owned by Nissan and Honda - are capable of rapidly switching from producing SUVs to more fuel-efficient vehicles.
"Steadily rising fuel prices since January 2002 have already shifted consumer demand away from large SUVs and pickup trucks, but U.S. manufacturers responded not by shifting their future product plans but by lowering prices on the same inefficient vehicles they've been offering for years," said Dr. Walter McManus, Director of Automotive Analysis for the University of Michigan Transportation Research Institute and a keynote speaker at the December briefing. "The SUV cash cow has turned out to be a Trojan horse."
The Ceres report analyzes several key trends that could affect the valuation of auto companies' securities:
- High oil prices and unstable gas prices at the pump. Even as President Bush has called on Americans to reduce their dangerous dependence on foreign oil, new predictions from the International Energy Agency (IEA) say that 95 percent of the world's economy may come to depend on oil from five or six politically volatile Middle Eastern and North African countries. In February, the U.S. Energy Information Agency raised its predictions for future oil prices, saying that oil won't fall below $42 per barrel over the next 20 years. As gasoline prices stay high, Americans will likely increase their demand for more fuel efficient cars. The Ceres report quotes Ford Sales Analysis Manager George Pipas, who said: "If gas prices don't stabilize, I think it's going to be a very tough endeavor to sell mid-sized and full-sized SUVs."
- New energy independence measures and climate change regulations taking effect globally. For the first time in 13 years, the United States passed a federal energy bill in 2005 that provides tax credits to consumers for purchasing fuel-efficient vehicles, and creates new mandates and incentives for the production, distribution and sale of renewable "biofuels." Canada, the European Union, China, Australia, Japan, Korea and other countries are taking steps to reduce greenhouse gas emissions and increase vehicle fuel efficiency, in part responding to the enactment of the Kyoto Protocol in February 2005. California and 10 other U.S. states have adopted or are adopting mandatory regulations to curb GHG emissions from vehicles - actions that are being opposed by most of the world's leading automakers.
- Alternative technologies and fuels will result in leaders and laggards. Some automakers, like Toyota and Ford, have increased their focus on hybrids and clean diesel, while others, like GM, have concentrated on deploying flex-fuel vehicles capable of operating on gasoline or ethanol. Hydrogen fuel-cell technologies are still a decade or more from commercial viability.
The December auto analyst briefing was co-sponsored by Ceres, the Investor Network on Climate Risk, the Natural Resources Defense Council (NRDC), JP Morgan, Cornell University and the Office for the Study of Automotive Transportation at the University of Michigan (OSAT).
Ceres is a national coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Ceres also directs the Investor Network on Climate Risk (INCR), a group of more than 50 institutional investors that collectively manage nearly $3 trillion in assets.